How to Improve Your Credit Score by Negotiating With Creditors

Paul Sisolak | August 13, 2015

Over time, delinquent debt is a financial hole that becomes deeper and harder to climb out of. It could be a past due credit card bill, or a car or mortgage payment. No matter how big or small, a debt left unchecked and unpaid will eventually find its way to a collection agency.

When this happens, the delinquent debt is filed on your credit report, a common problem in the U.S. According to a 2014 study from the Urban Institute, more than one-third of Americans have a debt in collections listed on their reports.

If you’re behind on bill payments, you can find ways to negotiate down your debts. Negotiating through your original creditor can help you dodge collection agencies, get rid of debt and improve your credit score.

Delinquency is determined by how many days, weeks and months your bill is overdue. Your creditor will report this delinquency to the three major credit bureaus so it is reflected on your credit report. The longer you wait, the more damage you’re likely to inflict on your credit score. The delinquency and reporting generally follows this hypothetical 180-day timeline:

First month: One missed payment won’t be reported to the credit bureaus by your creditor or lender, but it’s advisable to try and make some form of payment on your bill to avoid being completely delinquent.

Second month: Miss two monthly payments in a row, and your delinquencies start being reported. Thankfully, you can sometimes still catch up on payments without your credit score being terribly affected.

Third month: Three missed payments show credit bureaus you’ve made a habit of skipping payments. Your FICO score is vulnerable to damage at this point, according to CardHub, and could drop as much as 100 to 125 points.

Fourth month: By the 120th day of non-payment, your creditor is ready to hand over your delinquent account to a collection agency. Your credit score continues to decline as collection calls become more frequent.

Fifth month: Another month of no payments inflicts further harm to your credit score. Debt collections continue to urge you to pay up.

Sixth month: Using a delinquent credit card account as an example, after 180 days of zero payments your creditor is allowed to declare your account as “charged off.” Nearly as bad as bankruptcy and foreclosure, a charge-off is one of the worst things you can do to your credit score.

10 Tips to Get Rid of Debt

A successful debt negotiation with a creditor can carry several financial benefits. It can lower your interest rate or create a restructured or revised payment plan that makes it easier for you to pay down your debt. Remember you’re negotiating not haggling — if you’re in debt, you’ve got to broach the topic with your creditor gently to convince them you’re financially responsible and committed to tackling your debt. Keep these tips in mind to help you get rid of debt.

1. Create a Budget

Write out an itemized budget of your monthly income, your expenses and your credit accounts, including any that are delinquent. Second, gather each bill for every month you’ve been delinquent. If you receive paperless statements, print them out.

Not only will copies of your debts give you an idea of how much you can afford to pay back in a negotiated settlement, you can also show your creditor that you’re willing to look at the dollar figures objectively and critically.

2. Be Honest

“The best way to facilitate credit solutions is to employ open communication,” recommended John Heath, a credit attorney. “Your creditors will ask for an explanation regarding your financial troubles, so be clear and concise. Creditors will be more willing to work with you if they have a full understanding of your situation.”

3. Don’t Create Conflict

While it might seem like a good idea to march in with a commanding presence, any yelling, screaming, threats to sue or otherwise aggressive attitude won’t do you any favors with your creditor. Stay calm, collected and ask your creditor plenty of questions. Remember, you’re there to get back in their good financial graces.

4. Make Counteroffers

“Go into debt negotiations with an understanding of what your financial situation is,” said bankruptcy attorney Paul Kuzmickas. “Remember the most successful negotiations will take more than just a day. Be ready to have offers and counteroffers.”

5. Have a Plan of Action

Heath noted that after explaining your situation to your creditor, follow up with an actionable credit solution. “If you cannot make your minimum payment each month, ask them to reduce the amount for a short period of time until your finances improve,” he said. “Reiterate that you are committed to paying off your debt and keeping your account in good standing.”

6. Negotiate a Debt Settlement

Open up with a low offer — 15 to 20 percent — and aim to start your negotiations from that point. An ideal settlement will be around 30 to 50 percent of your debt. “In exchange for payment, ask the creditor to remove the account from your credit report, and request a confirmation letter stating the account will be removed prior to making a payment,” said Harrine Freeman, author of “How to Get Out of Debt: Get an ‘A’ Credit Rating for Free.”

Freeman said that if the creditor refuses to comply with that request, ask them to report the account as “paid” or “paid in full” to the credit bureaus. The delinquency will still be reflected on you report, but so will the payment status.

7. Push for New Terms

First, ask for a lower interest rate. The modified rate on your loan or credit card bill can help you pay down your debt more easily. According to Karlene Sinclair-Robinson, an alternative financing expert, you should also make other requests to your creditor. You can ask for a reduced debt balance, payment extension, due date change or elimination of fees, for example.

8. Pay Off Your Delinquency in Full

It can be hard to muster up the cash when you’re in debt, but paying off your entire delinquent payment in one lump sum can help. “Depending on the amount of the debt, it’s worth paying it in full to have it removed from your credit,” said Caton Hanson, co-founder of Creditera.

9. Consider Bankruptcy

“If you know that paying off all your debts is going to be a struggle no matter what down the road, start exploring [bankruptcy] as an option,” said Kuzmickas. Filing for bankruptcy, he said, involves wiping out your debts completely, whether through debt consolidation or a 3- to 5-year payment plan. “You can eliminate many, if not all, of your non-essential bills, freeing up the money you need for rent and basic necessities.” However, bankruptcy should be the very last option you consider.

10. Stay Positive

“When negotiating, it’s essential to remain confident,” said Jeremy Vohwinkle of Gen X Finance. “The potential to feel pressured or bullied is there, but if you stay on point, you will find yourself in better shape. Remember that [creditors] aren’t entirely in control of the situation.”

Seek Alternatives to Negotiation

If negotiations with your creditor come to an impasse, consider alternatives. Seek out a nonprofit credit counseling agency through the National Foundation for Credit Counseling to set you on the path to stamping out you debt and improving your credit score.

“They can help you evaluate your budget, your debts and explain your options, which include managing on your own, a possible debt management program and in more severe debt cases, bankruptcy counseling,” said Katie Ross, education and development manager for American Consumer Credit Counseling. “Your best option really depends on your specific situation. The ultimate goal is to repay your debts so you can begin rebuilding your credit history.”